Dubai’s Islamic bonds jumped the most in more than a month last week after Greece’s agreement on austerity measures eased contagion concerns in Europe, prompting investors to seek higher-yielding assets.
The rate on the sheikhdom’s 6.396 percent sukuk maturing November 2014 dropped 16 basis points last week, the most since the five days ending June 3, to 4.68 percent on July 8, Bloomberg prices show. Dubai’s unrated debt rose after the International Monetary Fund approved a 3.2 billion euro ($4.56bn) joint loan with the European Union on July 8, and European finance ministers agreed to extend 8.7 billion euros to Greece earlier this month.
“Dubai is one of the most liquid names in the region, so it’s susceptible to global market moves,” Adnan Haider, head of fixed-income and equities at Abu Dhabi Commercial Bank, said in a July 10 interview. “The austerity measures the Greek parliament passed, and the loans it got last week, abated fears that the Greek government was going to default on its debt.”
Yields on European debt declined last week on relief that Greece’s debt woes won’t stall global economic growth, which has yet to recover from the worst financial crisis since the Great Depression. In Dubai, whose government now directly owns property developer Nakheel PJSC following a $13bn debt deal last week, the non-rated sukuk continues to yield more than 58 basis points above the region’s average.
The yield on Dubai’s debt dropped to pre-Greece crisis levels last week after it soared to 5.1 percent on June 27, the highest in two months, on concern the European country will default on its debt. The difference between the debt and Malaysia’s 3.928 percent sukuk maturing June 2015 narrowed three basis points last week to 207.
Falling yields in US Treasury notes and a shortage of sukuk in the market, with issuance declining 5 percent in 2011 to $2.3bn compared with the year-earlier period, also helped boost demand for high-yielding Islamic bonds in region, Haider said. The rate on US Treasury’s five-year note tumbled 20 basis points last week to 1.58 percent on July 8. Eurobond yields fell two basis points to 5.91 percent, according to JPMorgan Chase & Co.’s EMBI Global index.
The emirate, with about $113bn in publicly held debt, has $31.2bn coming due in 2011 and 2012, according to an IMF report published June 16. State-owned Dubai World, which roiled global markets in November 2009 when it said it was seeking a standstill on debts, reached an accord to restructure about $25bn with creditors in March.
“Dubai names, which saw their securities get cheaper in June because of concern over Greece’s debt, have benefited from the rally as investors sought more high-yield assets,” Usman Ahmed, the head of fixed income at Emirates NBD Asset Management, a unit of the United Arab Emirates’ biggest bank, said in a telephone interview July 10. “Investors in the region, who understand the emirate and its fundamentals, are the majority of buyers.”
Dubai, the Persian Gulf business hub that set up a $5bn bond program in June, expects to reduce its 2011 budget deficit to AED3.8bn ($1bn) this year, the lowest in four years as it cuts spending, according to the bond prospectus distributed via the Regulatory News Service. The deficit was AED6bn in 2010 and AED12.9bn in 2009. The sheikhdom’s economic growth in 2011 will accelerate to about 3 percent, the IMF said in April.
The yield on state-controlled ports operator DP World Ltd.’s 6.25 percent sukuk due July 2017 fell 16 basis points last week, or 0.16 percentage point, to 5.4 percent on July 8.
The average yield on Islamic debt in the Persian Gulf declined five basis points last week to 4.1 percent, a six-year low, the HSBC/NASDAQ Dubai GCC US Dollar Sukuk Index shows. The extra yield investors demand to hold the debt over the London interbank offered rate narrowed 3 basis points in the period to 239.
Gulf sukuk returned 7 percent so far this year, compared with a 5.5 percent gain for emerging market debt, JPMorgan’s EMBI Global Index shows. The Bloomberg Malaysian Sukuk Ex-MYR Index, which tracks government and corporate foreign-currency bonds listed in Malaysia, climbed 5.4 percent this year.
In Europe, Portugal joined Greece as the only nations in the euro region to have junk ratings after Moody’s Investors Service downgraded it four levels to Ba2 from Baa1, two notches below investment grade. The cut sent the yield on Portugal’s five-year generic government bonds soaring 401 basis points to a record 17 percent on July 8.
Debt in Dubai “would likely be affected by developments in the euro zone if the situation worsens considerably and risk aversion rises,” Nick Stadtmiller, a fixed-income analyst at Emirates NBD PJSC, the UAE’s biggest bank by assets, said in an e-mailed response on July 7.
Subscribe to Arabian Business' newsletter to receive the latest breaking news and business stories in Dubai,the UAE and the GCC straight to your inbox.